Todd Nesnick
Let’s say you just had a great idea for a business.
You’re an excellent baker and your friends and family are going crazy for your homemade bagels. They can’t seem to get enough of them, no matter how much you bake. You’ve perfected everything from the brie bagel to the pizza bagel to the blueberry surprise bagel and you love doing it.
Now you want to start a small hobby business to help take your hobby to the next level. You’ve got great reviews and testimonials to help sell your product. You have a friend who will take amazing pictures in order to best sell your goods.
At this point, only one thing is standing in your way: money. You need to put some into your business in order to get the proper certification to be able to sell food. You’ll also need some specialized equipment, like an industrial mixer, a new set of mixing bowls, and sanitary food containers.
So what do you do if you don’t have the cash to make these investments? Is your business idea dead in the water? Not quite.
In this article we’re going to take a look at payday loans – the ins and outs, the pros and cons – to help you decide whether they are right for you and your current situation. We’ll walk you through the process and some of the different types of loans to help you make a smart decision that will work for you. At the end, you should feel confident moving forward to help bring your blossoming bagel business – or whatever the case may be – into the world.
Let’s get started.
Microloans
Another term banks use for payday loans is “microloan”. This refers to the amount in kroner that you will be borrowing. Many banks have different definitions of what constitutes a microloan, so you’ll want to be sure you know in advance how much you are going to need. Click here for more information about loans.
Returning to our example, your first step in obtaining a loan for your bagel business would be to add up the money you’ll need in order to get your business running.
Let’s say that you added up everything you would need, including the cost of renting a commercial kitchen for six months, and you’ve found that you would need forty thousand kroner. You’re in luck! The most common limit for a payday loan would be fifty thousand kroner or below, although some banks go as high as seventy-five thousand.
Let’s look closer at some of the terms of these loans.
Moving Forward
Once you’ve decided on the amount you’re going to ask for, it’s time to get to work.
One of the key differences between these types of loans and a larger loan is in the type of collateral. With many larger loans, a borrower has to offer something up as collateral. In this circumstance, collateral is just a big word that means a type of insurance. In taking out a large loan, you would typically offer up something of value to the bank as a way of guaranteeing payment.
Frequently this would involve a mortgage on your home. By using it as collateral, you’re saying to the bank that if for any reason you are unable to meet the terms of your loan, they can take ownership of your home. They can even auction it off in order to recoup their money.
It doesn’t have to be a mortgage; any item of substantial worth would do. For some that means a boat or a mobile home.
Now, if you’re not ready to put your home on the line in order to sell bagels part time, never fear! This is one of the areas where a microloan is set apart from other types.
Because of the relatively low amount you would be asking for from the bank, they do not require that you offer collateral. Your house, car, mobile home, or boat wouldn’t be on the line.
You might be asking yourself at this point, “What’s the catch? Why would banks be willing to offer such risky loans?”
If so, congratulate yourself. You’re on the right track, my friend!
There is something that the banks want in return for these unsecured loans. The interest rates are typically higher when you borrow money without collateral.
But just how much higher should you expect your interest rates to be? Well, that depends on a number of factors.
Factor Yourself In
The first thing that influences interest rates is the term of the loan. The longer the loan, the more your payments will be spread out.
That means that a loan with a repayment period of three months will have a higher effective interest rate than one with a twelve month or more term.
Keep in mind that you will have to pay fees with each payment installment. Again, the fewer the installments, the more the fees will be on each individual payment.
Let’s return to our bagel example again to help make this clearer.
Now, let’s say that you’re going to borrow forty thousand kroner. You believe that you will be able to pay back your loan in a matter of six months. Combined with fees, your effective interest rate might be over two hundred percent.
Now, let’s say that you want to extend the terms of your loan. Instead of six months, you would prefer to take two years to pay your money back. Now you might find that your effective interest rate is closer to ninety-five percent. You’re still paying fees with each of your payments, but they are spread out over a longer period of time, making each individual payment less than in our first example.
Another thing to keep in mind when considering your loan term is early repayment. Many banks do not charge extra for you to make extra payments. This means that even if you have agreed to pay your loan off over a period of two years, you are free to do it in a year or less, if you so choose.
This can make a big difference when you’re deciding on your terms. You’re better off taking the longer repayment period, because you can always pay off more than you prepared yourself for, but it’s much more difficult to pay less.
A Family Affair
Another thing for you to consider is whether or not you would like to ask someone to co-sign for you. Many banks require that this person be either your spouse or the person you cohabitate with.
Having an extra name on the account can mean lower interest rates. This is because the bank is taking less of a risk, since now two people are willing to take responsibility for repayment.
If this option is available to you, make sure you discuss the terms with your partner. It might be a good idea to have a written agreement between the two of you in the event of unforeseen circumstances. That way, there are no unpleasant surprises lurking for you down the road.
What’s Next?
Now you’ve decided on the amount of money you will need. You’ve talked to your partner about your expectations and decided to go into the venture together. You have a good idea of how much time you will need to pay your loan back.
Now you are finally ready to start contacting banks.
But where should you start? Should it be with a small bank or a large one?
Large banks have more resources at their disposal, and can usually offer better terms than smaller institutions. Your best bet is probably to apply for loans at the large banks and wait for an answer. If you are unable to secure what you need in this manner, then your next option is to go to smaller banks or other credit institutions.
Remember that you’re in the driver’s seat. Be sure to take your time and research all of your options. Although many banks have similar terms, you want to find the one that is best for you.
Starting a business, adding on to your home, or purchasing a moped is an exciting time in your life. Although you may be eager to get started on your next chapter, you’ll want to take your time and do what is right for you. Be sure to do your research before committing to anything permanent.